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4 Restaurant Stocks to Buy in 2008

Buy next year's eatery winners early.

I got my start in Fooldom a dozen years ago as the food-stocks analyst, so it's only fitting that I find myself back at the table today. Yes, that's how I earned my Fool.com wings. I started out as MF Edible, and later became TMF Edible, before leaping into my place as Breaker Rick with the Motley Fool Rule Breakers team of analysts.

Last week, I went over a few of the retailers and Internet stocks that I like for the year ahead. Now it's time to head back into the kitchen, where I get in touch with my roots to pull a few promising restaurant stocks out of the kettle.

Rather than bellyache over the rough patches that eatery stocks have had to endure lately, I prefer to look at the bright side of the sector. Fast-food chains are rediscovering the barbell approach of balancing value-menu items with more healthful premium-priced eats. Casual-dining chains are making the most of typically slow weekday dinner periods by ramping up their takeout options. Higher commodity prices, buoyant operating costs, and a shaky economy may all sting, but the quality names will find a way to come out on top. Let's look at some of those names.

Texas Roadhouse (NASDAQ:TXRH)
Publicly traded steakhouses have crept their way into the endangered-species list in 2007. Over the past year and change, the parent companies behind Lone Star Steakhouse, Outback, Smith & Wollensky, Logan's Roadhouse, and Longhorn have all been acquired. And one has to be upbeat about a sector that savvy private-equity firms are nibbling away at.

There aren't too many significant names left standing, and now Texas Roadhouse is the casual-steakhouse darling by default. The 275-unit chain posted respectable results in its latest quarter, with net income climbing 15% higher.

Analysts expect earnings to grow by 21% over the next five years. That's an encouraging sign, especially since Texas Roadhouse is priced at a discount in fetching just 19 times next year's bottom-line profit target.

Kona Grill (NASDAQ:KONA)
You don't typically get a chance to buy into a high-volume concept early in its growth cycle, yet here we have Kona Grill, with fewer than 20 locations. Before heading into a seasonal loss for the current quarter, the company posted a profit through the first nine months of the year.

Kona Grill serves up casual yet upscale eats. With its Polynesian-tweaked signature dishes and a lively sushi menu, the offerings are exotic enough to stand out without scaring away less daring patrons. The proof is in the comps, which have consistently come in increasingly higher during the company's brief run as a public company.

After stumbling early in the year, Kona came through with better-than-expected second and third quarters. The shares are trading near a 52-week low, as a result of a stock offering to bankroll expansion. With plans to tack on another six eateries on top of the four it added this year, now is a good time to take a chance on this high-risk, high-return play.

Benihana (NASDAQ:BNHNA)
Like Kona, Benihana is another ethnic specialist that's unfairly trading near its 52-week low. It continues to grow nicely -- it's now watching over 60 namesake teppanyaki joints, as well as 15 RA Sushi and eight Haru restaurants.

I really like this year's holiday promotion, which allows Japanese teppanyaki fans to offer chef experiences as a gift. Instead of the thoughtless gift certificates you can get anywhere, Benihana is offering lavish spenders the ability to buy an abridged training course, in which the recipient is taught tableside hibachi-cooking basics before personally preparing a meal for four guests.

In the meantime, the company's latest quarter was a mixed grill. Profits dipped despite a 14% top-line boost, but the company has also been pursuing an ambitious remodeling plan under which 16 more units will be added by year's end.

Taking Asian cuisine national has been a challenge in the past. The 42-unit China Coast chain was shuttered in the 1990s, and P.F. Chang's (NASDAQ:PFCB) is in a funk at the moment. Benihana's advantage is that it has a time-tested name and is really the only national brand in teppanyaki.

Jack in the Box (NYSE:JBX)
There are plenty of tempting burger chains to consider for 2008, but I keep gravitating toward Jack in the Box as the niche winner. The 2,100-unit namesake chain is benefiting from the same favorable comps-pumping trends within the industry, sure, but I'm particularly pumped about Qdoba, the company's 400-store quick-service Mexican concept.

Qdoba is no Chipotle Mexican Grill (NYSE:CMG)(NYSE:CMG-B), but Jack in the Box is clearly looking to Qdoba as its new workhorse. The company opened three times as many Qdoba units opened in the latest quarter as it did Jack in the Box burger havens. Comps are also higher at Qdoba than at Jack in the Box.

The company earned $1.88 a share in fiscal 2007 after posting a profit of $1.50 a share a year earlier. It's looking to generate net income per share of $1.98 to $2.06 in the new fiscal 2008, but don't let the slowing growth bring you down. The results are sandbagged as Jack in the Box spends money to remodel its locations (and award $25,000 bonuses to franchisees). The company's long-term profit growth goal is 12% to 15%. Trading at just 13 to 14 times the company's guidance for the current fiscal year, the stock is cheap. And don't overlook the potentially big kicker in a heartier Qdoba.

The coming year is going to be tasty for the right restaurateurs, so pack plenty of napkins.

If you like to take a longer view when you invest, you may be a good fit for our Motley Fool Rule Breakers newsletter service. There's a free 30-day trial waiting for you. Chipotle is an active recommendation at Rule Breakers, and its "B" shares have been recommended in Motley Fool Hidden Gems.

Longtime Fool contributor Rick Munarriz always believes in being fashionably early, but he does not own shares in any of the companies in this story. The Fool has a disclosure policy.

Author

Rick has been writing for Motley Fool since 1995 where he's a Consumer and Tech Stocks Specialist. Yes, that's a long time with more than 20,000 bylines over those 22 years. He's been an analyst for Motley Fool Rule Breakers and a portfolio lead analyst for Motley Fool Supernova since each newsletter service's inception. He earned his BBA and MBA from the University of Miami, and he splits his time living in Miami, Florida and Celebration, Florida.
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